One question I often ask myself is: "Would Warren Buffett (Trades, Portfolio) be able to replicate his historic performance in today's markets?"
Even though the "Oracle of Omaha" has said before that he could generate returns of 50% or more per annum if he were managing less money today, there are several factors present in today's markets that could make this process a lot harder.
The market is not what it used to be
For one, the markets today are much more efficient than they were when Buffett first started investing. Indeed, today all you need to do is to use a free stock screener and screen the market for the cheapest stocks -- something anyone in the world who has internet access can do.
Second, Buffett’s success has led to value investing becoming one of the most followed investment styles in the world. When he first started out, value investing was not entirely unknown, but it was not widely followed. Therefore the opportunities for value in the market were abundant. Today there are possibly tens of thousands of investors chasing the value style and this, coupled with the availability of stock screeners, means that the number of value opportunities has been dramatically reduced and when a company falls into value territory this market inefficiency is quickly corrected.
It's not just mom-and-pop investors who are actively chasing the value style either. There are hundreds of value-orientated hedge funds around today, all of which have some of the most talented people on Wall Street working for them as analysts whose full-time job it is to find value all over the world.
Put simply, today there is much more competition and money chasing after fewer opportunities, and this means it is harder to generate outperformance over the long term by investing in value.
Hunting for the best opportunities
That being said, there are value funds out there who have managed to outperform by investing in undervalued and unloved securities.
What links these funds is not their ability to find Benjamin Graham type deep value stocks, but the ability to uncover value in whatever form it may take including opportunities such as spin-offs, special purpose acquisition vehicles, contrarian opportunities and time arbitrage.
Finding value in any of these situations requires more effort than just screening the market for those stocks trading at a steep discount to tangible book value. To uncover these hidden opportunities value hunters have to spend a lot of time and effort looking under every rock. It is long, time-consuming work but it's just the kind of rigorous analysis that Buffett has always specialized in -- especially during his early career when he would spend days pouring over annual reports of any companies that attracted his interest.
Could he do it?
To answer the question of whether or not Buffett would be able to achieve the same returns today as he did in his early career; I believe that he could, although not by using the same strategy. As the market has changed over the past few decades, new opportunities have emerged, and buying undervalued small caps trading on the pink sheets is no longer the only way to make money from deep value investing.
I should also say that quite a few of the Oracle of Omaha’s early investment successes involved some form of activism on his part, where he had to encourage management to unlock value for shareholders. Even today this approach could still generate impressive returns, although thanks to the internet, corporate governance has dramatically improved since Buffett first started out as an investor.
In conclusion, to be a successful value investor today, you have to be willing to spend days researching an opportunity and have plenty of patience and concentration.
Because Buffett has always excelled at these things, it's reasonable to assume that despite the changes that have shaped the financial world over the past few decades, he would still be able to find the market's most undervalued opportunities today (but due to the constraints of Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) size, his hands are tied).
Disclosure: The author owns no shares mentioned.
